AutoNation 2006 Annual Report Download - page 51

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Table of Contents
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
date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered as of the required
effective date is recognized as the requisite service is rendered on or after the required effective date. Accordingly, the Company’s
Consolidated Financial Statements for prior periods have not been restated to reflect the adoption of SFAS No. 123R.
Prior to January 1, 2006, the Company applied APB 25 in accounting for stock-based employee compensation arrangements
whereby compensation cost related to stock options was generally not recognized in determining net income and the pro forma impact of
compensation cost related to stock options was disclosed. The Company’s pro forma net income and pro forma earnings per share that
would have been reported if the fair value method had been applied to all awards were as follows for 2005 and 2004:
 
Net income, as reported $ 496.5 $ 433.6
Pro forma stock-based compensation cost, net of taxes (9.3) (10.5)
Pro forma net income $ 487.2 $ 423.1
Basic earnings per share, as reported $ 1.89 $ 1.63
Pro forma stock-based compensation cost $ (.04) $ (.04)
Pro forma basic earnings per share $ 1.85 $ 1.59
Diluted earnings per share, as reported $ 1.85 $ 1.59
Pro forma stock-based compensation cost $ (.03) $ (.04)
Pro forma diluted earnings per share $ 1.82 $ 1.55
Risk-free interest rate 3.69-4.10% 3.12-3.93%
Expected dividend yield — —
Expected term 5 years 5 years
Expected volatility 33% 37%
Derivative Financial Instruments
The Company recognizes all derivative instruments on the balance sheet at fair value. The related gains or losses on these
transactions are deferred in stockholders’ equity as a component of Accumulated Other Comprehensive Income (Loss). These deferred
gains and losses are recognized in income or expense in the period in which the related items being hedged are recognized in expense.
However, to the extent that the change in value of a derivative contract does not perfectly offset the change in the value of the items being
hedged, that ineffective portion is immediately recognized in income. The Company recognizes gains or losses when the underlying
transaction settles.
During 2006, the Company had $800.0 million of interest rate hedge instruments (cash flow hedges) mature, consisting of
$200.0 million in swaps, which effectively locked in a LIBOR-based rate of 3.0%, and $600 million in collars that capped floating rates
to a maximum LIBOR-based rate no greater than 2.4%. The Company held no derivative contracts as of December 31, 2006.
At December 31, 2005 and 2004, net unrealized losses, net of income taxes, related to hedges included in Accumulated Other
Comprehensive Income (Loss) were $2.1 million and $(1.5) million, respectively. For the years ended December 31, 2006, 2005 and
2004, the income statement impact from interest rate hedges was an additional income (expense) of $1.8 million, $.2 million and
$(2.9) million, respectively. At December 31, 2005 and 2004, all of the Company’s derivative contracts were determined to be highly
effective, and no ineffective portion was recognized in income.
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